A fatberg is clogging up the housing market
Remember the horror of discovering fatbergs, huge blockages that had built up unseen in our sewer systems?
The parallels between fatbergs and interest-only buy-to-let (IO BTL) mortgage lending are striking.
Just as a blocked-up sewer eventually becomes impossible to ignore, even the government has now accepted the housing market is ‘broken’.
Transactions are flowing at a snail’s pace and hardly anybody is able to move: from aspiring first-time buyers, to ladder-climbers, to downsizers.
The government’s recent thinking is the answer to the jam is to enlarge and improve the sewer system.
However, if you climbed down there you would identify the fatberg as the immediate problem.
Fatbergs are built up by the contributions of thousands of actors, who understand their action can be collectively harmful but excuse their own profit.
In the same way a huge lump of property has gradually accumulated through years of IO BTL and is now choking the housing market’s circulation.
Interest-only lending has helped the private rented sector double from accommodating roughly 10 per cent of households in 2003 to 20 per cent in 2016.
Landlords loved interest-only lending because it means, unlike owner-occupiers, their cost of ownership doesn’t include capital repayments, only interest payments.
They also loved it because interest payments got offset against the tax they pay on rental income.
Banks loved interest-only lending because, unlike with owner-occupiers, the money they earn in interest never goes down over time because the loan balance never goes down.
All this lending helped to pump up house prices in areas of strong employment, which helped to price out first-time buyers, which meant they paid more rent to landlords, who then decided to buy more houses thanks to low interest rates.
IO BTL has built up a fatberg of property held by people who have no interest in selling, making it more expensive for everyone else to move.
We should enlarge the sewer, but let’s also blitz the fatberg.